Central banks of developed economies are ready to liberally use the printing press to get over the crisis

Richard Iley

The year 2012 was difficult for the global economy in general, and India in particular. The US economy remained the ‘best of the West’, with real GDP growth running at close to 2% and mounting evidence that its housing market is finally emerging from its worst downturn since the Great Depression. But the unemployment rate stayed stubbornly high at around 8% as uncertainty over the politicians’ ability to put its public finances on a sustainable course and navigate the so-called ‘fiscal cliff’ curbed animal spirits and crimped business spending.

The US also suffered from weak export demand, especially from the troubled euro area, which remained mired in recession. At least the worst fears of a collapse of the euro that were so prevalent a year ago were averted with the European Central Bank (ECB) twice stepping in to save the day. Under the new leadership of Mario Draghi, the ECB first bailed out the European banking system with huge injections of liquidity early in 2013. ‘Super Mario’ then effectively backstopped the bond markets of Spain and Italy with his promise to buy their debt if necessary. So far, Mr Draghi’s ‘Jedi mind-trick’ has worked perfectly. The promise of buying debt if necessary has calmed financial markets to the point that the ECB’s firepower has so far not been required. Greece has needed two huge bailouts over the last year but remains in the eurozone and the fears for a Grexit have similarly retreated for the time being.

Perhaps the biggest surprise was the weakness of the BRICs, which began to buckle under the strain of carrying the world economy since the collapse of Lehman Brothers. China saw its economic growth slow to sub-8%, the slowest since the Asian crisis as it continues to suffer indigestion from its credit splurge of 2009 to 2011. India too saw its growth slide to a near decade-low of around 5.5%. Brazil fared even worse with GDP growth tumbling to less than 1%! Completing the dismal picture, Japan, the perennial underperformer, slipped back into recession with a combination of weak global and trade tensions with China denting its export performance.

2012’s disappointing macro-outcomes however have likely sowed the seeds for better performance in 2013. Policymakers globally appear to be responding to disappointing macro-economic out-turns with increased urgency as central banks